Opportunity looms for premium Chinese water brands

Updated: 2012-08-13 00:22

By Zheng Yangpeng (China Daily)

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On July 6, after a month-long silence, Evian held a news conference in Shanghai to address the issue of the excessive nitrite found in its products.

Dai Ning, general manager of Danone Premium Brands, which owns the Evian brand, said his company could not confirm that the water that failed an inspection was produced by Evian.

Excessive nitrite intake can cause oxygen depletion and even cancer if ingested over a long period of time.

"It’s hard to confirm if the affected products were real Evian water, or where they came from, because they were not imported by an assigned official importer to the Chinese market," Dai said.

Untapped ocean

This was the sixth time in the last six years that the company was inspected due to quality problems. Experts said that even if the tainted water was indeed not produced by Evian, the incident exposed the company’s weak control over its import chain and its vulnerability to negative news.

For most domestic water companies, the Evian incident offered a rare opportunity to catch up.

A number of Chinese companies are quietly setting foot on the high-end water market, long dominated by overseas brands like Evian, Volvic and Perrier. A few domestic brands — such as 5100 Tibet Glacier Spring Water — have already exceeded the sales of those foreign giants.

In its latest financial report, Tibet 5100 Water Resources Holdings Ltd, which produces the water, said its revenues in 2011 were 633 million yuan ($99.2 million), up 76 percent from the previous year.

The figure is impressive, given that the company’s first production line was set up only five years ago. In that time, the company went public in the Hong Kong Stock Exchange, becoming the first domestic premium mineral water maker to launch an IPO.

For other water companies, the high profit margins are more appealing. In the financial report, Tibet 5100 said its gross profit margin was 79 percent, up from 64 percent a year before.

A report by Euromonitor said the profit margin of high-end bottled mineral water is six to seven times that of the bottled water for the general market.

For many Chinese water companies, long disappointed with the industry’s meager margins, the lucrative high-end market is an untapped ocean.

According to CIConsulting, an industry research institution, the market value of high-end bottled water in 2011 was 3 billion yuan and the figure is projected to grow to 10 billion yuan by 2015.

But given the size of China’s market, the figure is a drop in the ocean. Chinese people on average drink 18 liters of bottled water a year, compared with 117.5 liters in Europe.

Liao Lei, secretary-general of the China Mineral Water Committee of the China Mining Association, said that Tibet 5100 is one of the few brands making a profit. Of the 100-odd major domestic mineral water producers, most are suffering losses or only making meager profits.

According to Liao and other industry experts interviewed by China Daily, low recognition, among other factors, are hindering the companies’ chances of transferring the huge potential into tangible profits.

Even though the public isn’t aware of it, the natural mineral water business involves little processing.

"We just do some basic filtering. But even the filtering is a preventative measure because there are virtually no impurities in the water," said Pang Zhenguo, general manager of quality assurance at the JDB Group, which produces Kunlun Mountains water.

Daunting task

Compared with manufacturing, finding an appropriate water source and then placing the product in stores’ shelves is a much more daunting task.

Pang said it took him 10 years to spot a place on the Kunlun Mountains in West China and build a factory there.

The time span, which initially seems exaggerated, becomes more plausible after Pang explains his criteria.

The water quality is the top concern, and mineral water from Kunlun Mountains meets that criteria. But according to the China Mineral Water Committee, there are 4,400 spots capable of producing mineral water across China.

Other factors must be crossed out also, which makes the process so time consuming.

Pang said that low population density, easiness to conserve water quality, and water quantity are all critically important for the selection of the water source. In order to find the right source, he said he had to scour "every corner" of Tibet, a region believed to have some of the few uncontaminated water sources in China.

But several places in Tibet — which has also the best water quality — either didn’t have enough water or it wasn’t easy to conserve the water quality. So they had to be dropped from the list.

"One spot in Tibet had good water quality, but it wasn’t far from a highway. The road made it difficult to set up a large conservation area to prevent contamination," said Pang.

The current site for Kunlun Mountains water is protected by JDB with a conservation area of 11 square kilometers.

Pang said that an area on the Changbai Mountains in Northeast China was considered, but the fact that too many domestic companies use the mountains for their branding made him drop it.

"The water source is the most valuable asset for a mineral water brand. If another company which uses the same asset does something wrong, it will be an irreversible damage to my brand," Pang said.

Exploration was further delayed by the release of a new national standard for mineral water in 2008. The standard imposed stricter upper limits for several substances. The standard for bromate, a potential carcinogen, for example, was lowered to below 0.01 milligram a liter.

In 2007, Pang finally found the right place — Xidatan on the Kunlun Mountains, a site on the Tibetan Plateau that is 4,100 meters above sea level.

The site, according to Pang, provides sufficient and high-quality mineral water, is backed by a runoff made of melting snow, and has a low population density, making it easier to conserve water quality.

But that wasn’t enough. To test if the water quality was stable enough, Pang sampled the water every month for six months, and sent the samples to three independent laboratories. The results finally persuaded him to build his factory there.

The efforts by Pang and his team have paid off.

In February, Kunlun Mountains Natural Mineral Water won the Watermaster’s Golden Award of Excellence at the annual Berkeley Springs International Water Tasting, an event dubbed the water industry’s Oscars.

Tian Wei, JDB Group’s brand manager, said the reward was a proud moment for her and for the company.

"It’s the first time that a Chinese brand, or even an Asian brand gets this honor," Tian said.

She said that JDB was invited by Arthur von Wiesenberger, president of the event, after he tasted the water in China. He even flew to Xidatan to check the site.

"He tasted the water on the mountains and found the taste to be almost the same as the bottled water," Tian said.

Brand recognition

But despite the industry’s recognition, what nags Pang and other people in the business is the low recognition among ordinary consumers.

Industry experts said that the biggest challenge is to persuade the notoriously price-sensitive Chinese consumers to pay extra for high-end water.

"The biggest bottleneck for the development of the high-end water market is the poor recognition among consumers toward high-end water brands," said Liang Mingxuan, a food industry analyst with CIConsulting. "In mature markets, such as Europe, people have high requirements for water. But not here."

However, Liao of the China Mineral Water Committee cautioned that high prices do not necessarily mean high-end water.

China’s water industry normally defines high-end water as products above 4 yuan per bottle of about 500 milliliters.

But to Liao, only mineral water can be called high-end water.

"At least 70 percent of China’s surface water have been polluted. Unlike surface water, mineral water is usually hundreds of meters underground, so it’s free from contamination," Liao said.

He added that, also unlike surface water, mineral water is considered a mineral reserve of the state and thus is subjected to an extra resources tax, which adds up to the cost of the water.

"People who have been to a decent mineral water production base would realize that the price they are paying is not too high," Liao said. "The Kunlun Mountains water is actually being sold at a low price."

Kunlun is sold at 4.8 yuan for a bottle of 510 ml.

At a Ito Yokado outlet in Beijing, most consumers surveyed by China Daily couldn’t tell the difference between "mineral water" and "mineral substance water", a kind of water that is made of surface water with mineral substances added during processing.

"Isn’t this mineral water?" a consumer asked, pointing to Nongfu Spring, a bestseller in the store, according to Ito Yokado’s managers. Nongfu Spring is made of reservoir water.

Sales staff at a Ito Yokado’s Beijing store said that bottled water with high-price tags is difficult to sell, including Kunlun Mountains water.

"5100 Tibet sometimes sell well, but only when there’s a promotion," a staff member said. When there is a promotion, 500 ml of 5100 Tibet sells for 8.9 yuan, down from 10.9 yuan.

"I often quietly observe people’s buying habits in stores. In most cases, after a long comparison, young men take the cheapest bottled water," Liao said.

In addition to the Chinese consumers’ low loyalty to bottled water brands, there is widespread cynicism about the manufacturers’ claims regarding the place of origin.

"I would pay more money to buy Kunlun Mountains water if it is really from Kunlun Mountains," a women in her twenties said. "But is it really from there?"

Better strategies

But despite the low recognition and trust, some brands were able to steer away from traditional sale channels, such as stores, and found opportunities elsewhere.

5100 Tibet Glacier Spring Water, the bestseller among domestic premium water brands, managed to grab a niche of high-end channels such as the high-speed railway. In 2007, it signed a strategic contract with China Railway Express, the purchasing agent for China Railways. The contract gave 5100 Tibet access to the high-speed train market and was decisive in the company’s commercial success.

In 2010, the water sold to China Railway Express accounted for 81 percent of Tibet 5100’s revenue, the company said. In its statement before the IPO, the company vowed to diversify its client base and reduce its reliance on CRE to 59 percent.

Tibet 5100 has since signed contracts with local governments, Air China, China Mobile and BP Plc. In its latest marketing campaign, it’s selling a "water card" through online retailers. Customers who buy the prepaid card get a home-delivery service.

In its 2011 financial report, Tibet 5100 said its reliance on China Railway was reduced to 62 percent.

Kunlun Mountains water is clearly lagging behind.

"You can’t expect to recover costs within three to five years," Pang said, indicating the business is still operating at a loss.

The water’s place of origin, a long distance from major markets in eastern China, means expensive transportation costs. Heavy marketing was another major cost for the brand.

For JDB — which also produces the popular herbal tea Wanglaoji, with more than 18 billion yuan in sales last year — the huge investment in Kunlun Mountains water is bearable, at least for now. JDB said it has hopes of making a profit due to economies of scale, by expanding production capacity.

But finding a way to develop the brand in a competitive niche market — like its rival Tibet 5100 — is perhaps a more important question.